Cartoon of the Day: Inflation T-Rex

CORELOGIC HPI DATA - THE DILEMMA

Takeaway:Corelogic data shows 1-month of stabilization amid what has been a steadily decelerating trend.

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.

Today's Focus: July/August CoreLogic Home Price Report

CoreLogic released its monthly home price report for July/August earlier this morning. Unlike S&P/Case-Shiller, which is a rolling 3-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller.

The Data: Home price growth accelerated +10bps to 7.4% in July vs downwardly revised June figures (June revised from +7.5% to +7.3%). The forward looking projection for August estimates a MoM increase of +0.6%, which equates to flat sequential year-over-year growth of +7.3%.

The Dilemma(s):

Revision to HPI estimate methodology: Back in February, CoreLogic revised the methodology underpinning its month ahead HPI estimate from one based on hard, MLS price data to an econometric model consistent with its intermediate and long-term HPI projections. Subsequent to the February methodology change, the volatility and magnitude of revisions seems to have increased significantly. In short, the forward 1-month estimate has become a less reliable indicator of real-time HPI trends

June/July – A Tale of Shifting Slope: Last months (June) release was consistent with the post-February HPI deceleration trend with home price growth slowing from 8.3% in May to 7.5% in June to +7.0% in July. However, the estimate revisions in the July release completely shifted the slope in HPI – instead of consistent, ongoing 50-80bps deceleration in the rate of HPI change, the latest release shows a positive inflection in July and the expectation for 3-months of stable growth through August.

The Decision: Its worth re-highlighting our base conceptual framework for housing as its been effective across cycles:

We have anchored on the 2nd derivative move in HPI trends as a key signal because, historically, equity prices across the housing complex have followed the slope in home price growth.

This same dynamic has played out again in 2014 with housing related equities posting negative returns and significantly underperforming alongside the 4 months of discrete deceleration since home price growth peaked in February.

Headfake or Inflection: So, what do we do with a fledgling inflection in home price growth?

Tactically, to the extent the market is discounting zero or low-single digit price growth into 1Q15, a flattening or slowdown in the rate of home price deceleration would be a positive catalyst for housing equities.

The July HPI data is certainly a notable counter-trend shift but with just a single month of data, steepening comps in the back half of the year, and our demand model signaling an imminent peak in HPI, we’re hesitant to pivot on our bearish intermediate term outlook on housing. Bottoms (& tops) are processes, not points, and, at present, we’re content to await confirmatory data.

It's worth noting that while sales comps ease through 2H14, price comps don’t begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.9% YoY). As such, we think the next 6 months of pricing data will continue weigh on the housing complex.

About CoreLogic:

CoreLogic HPI incorporates more than 30 years worth of repeat sales transactions, representing more than 55 million observations sourced from CoreLogic's property information database. The CoreLogic HPI provides a multi-tier market evaluation based on price, time between sales, property type, loan type (conforming vs. nonconforming), and distressed sales. The CoreLogic HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate constant-quality view of pricing trends than basing analysis on all home sales. The CoreLogic HPI covers 6,208 ZIP codes (58 percent of total U.S. population), 572 Core Based Statistical Areas (85 percent of total U.S. population) and 1,027 counties (82 percent of total U.S. population) located in all 50 states and the District of Columbia."

Joshua Steiner, CFA

Christian B. Drake

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"With Durant's seven-year contract with Nike expiring, Under Armour offered him a 10-year deal worth $265 million to $285 million. According to ESPN, Nike exercised its right to match any rival shoe company's offer to the All-Star guard. Nike officials told Durant and his representatives at Jay Z's Roc Nation Sports on Saturday that they would match Under Armour's offer."

"Based on the ESPN report, Durant stands to make more money from Nike over the next two years than the $41.2 million the Thunder will owe himduring that span."

8 Quick Takeaways on the Nike/Durant deal:

The extra $20 million dollars in endorsement spend per year needs to generate an incremental $150mm in footwear sales in order to make it margin accretive for NKE.

In other words, KD needs to eclipse King James as the leader in the basketball footwear marketplace.

For NKE that translates to 0.9% growth in its footwear business - for UA to make the $28.5mm deal margin accretive it would need to grow the footwear category by 76%.

Uner Armour's bid did not have much to do with ROI.

The reality is that Under Armour is big enough now that it probably needs a mega-star to grow its footwear business and elevate its brand.

Tom Brady (UA's biggest name currently) won't cut it.

When the brand was in its infancy, it could simply put basketball shoes on "C" players in the NBA, and it was enough to boost the brand. Those days are over.

Our sense on this loss is that UA will come back heavy within six months' time and endorse someone big. It already has Board approval for the capital outlay, and it won't let that money go unspent.

"'Excited and humbled to sign back with the swoosh!' Durant tweeted late Sunday, referring to the Nike logo."

"'We are pleased to extend our relationship with Kevin Durant, one of the most exciting players in the game,' said Heter Myers, a spokesman for Nike."

"With Durant's seven-year contract with Nike expiring, Under Armour offered him a 10-year deal worth $265 million to $285 million. According to ESPN, Nike exercised its right to match any rival shoe company's offer to the All-Star guard. Nike officials told Durant and his representatives at Jay Z's Roc Nation Sports on Saturday that they would match Under Armour's offer."

"Based on the ESPN report, Durant stands to make more money from Nike over the next two years than the $41.2 million the Thunder will owe himduring that span."

Takeaway: Going from $8.5mm to $28.5mm per year is a nice pay day for KD. The extra $20 million dollars in endorsement spend per year needs to generate an incremental $150mm in footwear sales in order to make it margin accretive for NKE. Meaning KD needs to eclipse King James as the leader in the basketball footwear marketplace. For NKE that translates to 0.9% growth in its footwear business - for UA to make the $28.5mm deal margin accretive it would need to grow the footwear category by 76%. But for UA, its bid did not have much to do with ROI. The reality is that the company is big enough now that it probably needs a mega-star to grow its footwear business and elevate its brand. Tom Brady (UA's biggest name currently) won't cut it. When the brand was in its infancy, it could simply put basketball shoes on C players in the NBA, and it was enough to boost the brand. But those days are over. Our sense on this loss is that UA will come back heavy within six months' time and endorse someone big. It already has Board approval for the capital outlay, and it won't let that money go unspent.

"Dollar General Corporation today announced that it has sent an enhanced acquisition proposal to the Board of Directors of Family Dollar Stores, Inc. Under the terms of the revised proposal, Dollar General would increase its all-cash proposal for all outstanding shares of Family Dollar to $80.00 per share."

"To provide even greater certainty of consummation to the Family Dollar Board, Dollar General also increased the number of stores that it would be willing to agree to divest to 1,500 if ordered by the Federal Trade Commission and, as further evidence of its confidence in its ability to obtain antitrust approval, has agreed to pay a $500 million reverse break-up fee to Family Dollar relating to antitrust matters. All other terms and conditions of the proposal remain unchanged."

Takeaway: At $80 the new offer is now a 7.5% premium to the DLTR offer on the table up from 5.5%. To us, these seem like baby steps. In addition, DG's comment that it will divest up to 1,500 stores if required to do so by the FTC seems pretty ridiculous. It will divest EVERY store that the FTC mandates. It should have said what it means, which is that "we won't walk away form this deal as long as the FTC mandates 1,500 stores or less."

On the whole topic of anti-trust, we're sticking to what we said when the bid was announced. We can debunk FDO's reasoning with just one word: Walmart. We have a hard time seeing how the FTC would be overly concerned with a dollar store monopoly. First, there's not a single thing inside a Dollar Store that is proprietary to that format. Second, FDO and DG have both been shifting increasingly to consumables. The combined company could not have monopolistic qualities in that regard even if it tried. But most importantly, as noted above, all DG's lawyers have to do is utter one word to the FTC -- WalMart. Even if WMT wasn't rolling out a neighborhood market concept, it would be so hard to prove that a merged DG/FDO is bad for the consumer. FDO's tactics are a head-scratcher if it's goal is to maximize shareholder value.

We still think DG wins at a price of $85 or more, implying 12.5x LTM EBITDA. #expensive (even more so if it includes shrinking its core -- which will presumably be among its better locations)

"Lululemon Athletica Inc.’s new general manager for Asia said this year and next will lay the groundwork for the yogawear company’s global expansion plans as the brand tries to tap into China’s growing interest in the sector."

"The brand already has seven 'showrooms' in Asia — four in Hong Kong, two in Singapore and one in Shanghai…the brand is looking to open its first full-fledged store in Asia, either in Hong Kong or Singapore, possibly as soon as the end of this year. The company is also working on rolling out a Chinese-language Web site by mid-2015. After the Chinese site’s launch, Lee hopes to set up a shop in Alibaba’s Tmall."

"Lee said there are feasibility studies under way for Japan and South Korea but the company’s focus is setting up shop in China. He declined to give sales figures, but said that Lululemon’s China sales have the potential to double those of the brand in America, adding that the profile of the company’s typical customer in China is a professional woman aged 25 to 40."

"Unofficial estimates suggest 10 million people are practicing yoga in China...Yan said China’s yoga industry is growing three times faster than the U.S. and she is optimistic that foreign labels such as Lululemon will do well if their marketing is done right."

Takeaway: Some interesting color on the Yoga market in China. According to this article, about 10mm people practice Yoga in China (0.7% of the population) compared to 20mm in the US (6.5% of the population). In the US, the average Yogi spends on average $505 per year on yoga - $325 of which is spent on apparel and equipment. If we do some back of the envelope math and extrapolate that to China we get to a $3.25bil addressable market, which according to the owner of the largest studio network in the country is growing at a clip 3x that in the US. LULU is in print saying it would have 20 stores in Asia by 2017, but perhaps the more interesting play here is the online T-Mall store. Brands like NKE, AdiBok, and GPS already have store fronts on Alibaba's marketplace giving the brands a reach far beyond what current retail footprints allow. LULU would be wise to follow suit.

"'We’ve got to keep evolving this company. We are not going back to 2011,' Ullman said during an interview at the grand opening of Penney’s in Brooklyn on Friday, showcasing the company’s most advanced vision on interior design and merchandise display."

“'Despite all the turnaround issues, we are using this store as a laboratory,” Ullman said. 'By far, this is the most impressive and best expression of J.C. Penney.'”

"Ullman said he expects the Brooklyn store to rank among the chain’s top 10 performers...Ullman made the decision to open at Gateway during his first stint at Penney’s. He declined to project a volume for the store, though one official said that, since the soft opening a week before the official opening, business was 12 percent ahead of plan."

The ratings agency lowered its corporate credit rating on the Los Angeles-based vertical retailer to 'CCC-minus' from 'CCC' and its rating on the company’s $200 million in senior secured notes due in 2020 to 'CC' from 'CCC-minus.'"

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